United Airlines’ best hope to emerge from bankruptcy with strong financial backing was dashed by a government assistance panel, potentially setting the stage for further cuts and restructuring at the world’s No. 2 carrier.
The Air Transportation Stabilization Board late Thursday denied United’s request to guarantee $1.6 billion of a $2 billion private loan, leaving the status of the airline’s makeover in question after 1½ years in Chapter 11 bankruptcy.
United retains a glimmer of hope for the long-sought loan guarantee. Two of the three agencies involved in the board said they would consider a revised application by the airline, whose executives immediately moved to make changes and resubmit it.
Chief operating officer Pete McDonald told union leaders on a conference call that a modified application would be submitted in “days, not weeks,” and that United hopes to wrap up the process quickly. A summary of his comments posted on an employee hot line Friday did not address what changes are being considered.
Barring a quick reversal, however, a pressing need for cash will likely prompt United to seek help from investment groups that are certain to demand more cutbacks in exchange for their equity. That would be another painful blow for employees who already have made concessions saving the company $2.5 billion annually in labor costs.
Passengers could feel little impact from the additional financial turmoil unless routes are eliminated to slash costs. But without the federal assistance, analysts said the airline may have to renegotiate deals with unsecured shareholders, end pension benefits and turn over majority control to an outside group — if not delay its emergence from bankruptcy until 2005.
“It’s going to mean some big changes at United,” said Darryl Jenkins, head of the Embry Riddle Aeronautical University at Daytona Beach, Fla., and a consultant to numerous airlines. “They’re going to have to go and get more concessions.”
“There will be plenty of people willing to provide United equity,” Jenkins said. “But they have a tough quarter ahead of them.”
Five days after being turned down by the board for a similar request on Dec. 4, 2002, the airline filed for Chapter 11 bankruptcy protection amid fears it might not survive. This time, while it remains unprofitable, there’s little concern the Elk Grove Village, Ill.-based carrier will liquidate.
“It’s not the end of the world,” said Michael Shonstrom, of Denver-based analyst group Shonstrom Research Associates. “At this point it takes away a margin of safety and time associated with getting the airline on solid ground in terms of operating credibility.”
Even the federal assistance board, which criticized United’s unsound business plan 19 months ago, paid tribute to its steps in bankruptcy to lower costs, strengthen its competitive position and improve its governance structure. Unfortunately for United, that progress may have cost it the government aid.
“A majority of the board believes that the likelihood of United succeeding without a loan guarantee is sufficiently high so as to make a loan guarantee unnecessary,” the board statement said. A guaranteed loan to United, it said, “is not a necessary part of maintaining a safe, efficient and viable commercial aviation system in the United States.”
Two members — Treasury Department’s undersecretary for domestic finance, Brian Roseboro, and Federal Reserve member Edward Gramlich — voted to deny the company’s request. Jeffrey Shane, an undersecretary at the Transportation Department, voted to defer a decision for one week.
Both the Treasury and Transportation departments issued statements saying they would reconsider an improved application by United in the coming days.
United called the board’s decision “perplexing and premature.”
“We do not believe that the board was made fully aware of the important modifications United was willing to bring to the table,” the company said in a statement. “We are respectfully petitioning the ATSB for reconsideration of our pending loan application.”
United chief executive Glenn Tilton said in an interview with The Associated Press last week that the company’s restructuring has left it on solid enough footing to emerge from bankruptcy by year’s end, even if the loan guarantee request was rejected. But since Tilton’s recovery plan counted heavily on getting the loan guarantee, his job is now in jeopardy.
“I think this will be the end of Glenn Tilton’s tenure,” Jenkins said. “I think other people in United’s top management team will be forced out.”
The board’s denial drew harsh criticism from United’s unions.
“The ATSB failed to stabilize the industry they were created to protect,” said Robert Roach Jr., a vice president for the International Association of Machinists and Aerospace Workers.
The board was established by Congress to oversee a $10 billion loan program, part of an airline industry bailout after the Sept. 11, 2001, terrorist attacks. It has issued six loan guarantees totaling $1.56 billion.
United’s bid was perceived as being hurt by the continuing struggles of US Airways, even after it received a $900 million loan guarantee. Soaring jet fuel costs also have damaged United’s bottom line, adding $750 million in expenses this year, and resulted in greater bankruptcy losses than expected.